Home - Blank Rome LLP

Register to receive insights and analyses on breaking news and trends across varying industries.
<a class="link-primary mt-4" href="/subscribe">Subscribe</a>

Philadelphia, PA

New York, NY

Wilmington, DE

Cincinnati, OH

Princeton, NJ

Los Angeles, CA

Houston, TX

Tampa, FL

Shanghai

South Florida

Pittsburgh, PA

Washington, D.C.

Chicago, IL

Orange County, CA

Dallas, TX

Boston, MA

The application of the federal “step transaction” doctrine to New York City (“NYC”) real estate transactions can severely limit application of the long-standing “mere change in form” exemption under NYC’s real property transfer tax (“RPTT”). Case in point: a recent decision of the NYC Tax Appeals Tribunal, reversing a determination of an Administrative Law Judge (“ALJ”), and ruling that a deed of real property from an existing limited liability company (“LLC”) to a newly-formed LLC—both beneficially owned 50-50 by the same two owners—did not qualify for a full “mere change” exemption because the newly-formed LLC thereafter admitted a new 40 percent member to develop the property.&nbsp;<a href="https://www.nyc.gov/assets/taxappeals/downloads/pdf/2018DEC0925.pdf">Matter of 105-02 Forest Hills, LLC et al.</a>, TAT (E) 20-18(RP), 20-19(RP) (N.Y.C. Tax App. Trib., Sept. 3, 2025).&nbsp;

core/paragraph

The Facts:&nbsp;Don Rick Associates LLC (“Grantor”) deeded a commercial building to 105-02 Forest Hills LLC (“Grantee”) (“Deed Transfer”), a newly formed LLC entity owned by GG Forest Hills LLC (“GG”). The Grantor’s two 50 percent members also indirectly owned, through GG, the same percentage interests in the Grantee.

Since the Grantor’s two members owned the same beneficial interests in the building both before and after the Deed Transfer, the Grantor claimed a 100 percent mere change in form exemption from the RPTT. Under the RPTT, a conveyance of real property or an economic interest in that property that effects a “mere change of identity or form of ownership” is exempt “to the extent the beneficial ownership” in the realty before and after the transaction remains unchanged. NYC&nbsp;Adm. Code § 11-2106.b(8).

Approximately two months after the Deed Transfer, another party, SPG Forest Hills LLC (“SPG”), was admitted as a 40 percent member of Grantee to develop the realty (“Interest Transfer”). GG continued to own the remaining 60 percent. It does not appear that an RPTT return was filed for the Interest Transfer, presumably because it was considered a nontaxable transfer of a 40 percent economic interest in Grantee. Separate from deed transfers, the RPTT also applies to the transfer of an economic interest in an entity that owns real property, but only for transfers of a 50 percent or more interest in the entity.&nbsp;

ALJ Determination:&nbsp;The NYC Department of Finance (“Department”) assessed RPTT, invoking the “step transaction” doctrine to collapse the Deed and Interest Transfers into a single transaction, and reducing the 100 percent “mere change in form” exemption by the 40 percent economic interest in Grantee acquired by SPG. The ALJ ruled in favor of Grantee, holding that while the Department was authorized to apply the step transaction doctrine, the substance of the collapsed transaction was the transfer of a less-than-50 percent membership interest in Grantee. An appeal to the NYC Tribunal followed.

Tribunal Decision: The NYC Tribunal disagreed with the ALJ determination and upheld the assessment, adopting the Department’s position that when the Deed Transfer and Interest Transfer are collapsed under the step transaction doctrine, the “Grantor retained a 60% majority economic interest in the Property and SPG received a 40% minority economic interest in the Property.” According to the Tribunal, this meant that “40% of the&nbsp;transaction”(emphasis added)—i.e., both the Deed Transfer and the Interest Transfer—was taxable because the mere change exemption on the Deed Transfer applied only to the extent of the Grantor’s retained 60 percent interest in Grantee.&nbsp;

Observation: The NYC Tribunal decision is a stark reminder of the considerable uncertainty under the RPTT caused by application of the “step transaction” doctrine, a federal income tax doctrine that the NYC Tribunal first authorized in&nbsp;Matter of GKK 2 Herald LLC,&nbsp;TAT (E) 13-25 (RP) (NYC Tax App. Trib. 2016),&nbsp;aff’d, 154 AD 3d (1st Dept 2017). There is no mention of the doctrine in the RPTT regulations and, specifically, no mention of how it is applied to recharacterize a series of transactions to limit a “mere change in form” exemption. Considering the continued uncertainty, NYC property owners should carefully structure transfers to account for potential application of the step transaction doctrine.

core/separator

This update is one in a series of updates written for the&nbsp;<a href="https://www.blankrome.com/publications/br-state-local-tax-spotlight-october-2025">October 2025</a>&nbsp;edition of&nbsp;The BR State + Local Tax Spotlight.

© 2025 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.

NYC Tax Tribunal Applies Step Transaction Doctrine to Limit “Mere Change” Exemption Under Real Property Transfer Tax

Offices

Stay Connected

Slide Menu

Slide Search

NYC Tax Tribunal Applies Step Transaction Doctrine to Limit “Mere Change” Exemption Under Real Property Transfer Tax

Offices

Stay Connected